Ambarella (NASDAQ:AMBA) Q3 2020 Earnings Call

0:01 Ladies and gentlemen, thank you for standing by and welcome to Amber Rella's Q3 Fiscal Year 2020 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Louis Gerhardy, Corporate Development. Thank you. Please go ahead, sir. Thank you, Gigi. Good afternoon, and thank you for joining our third quarter fiscal 2020 financial results conference call. Our speakers will be Dr.

0:47 Feng-Ming Wang, President and CEO, and Casey Eichler, CFO. The primary purpose of today's call is to provide you with information regarding the results for the third quarter of our fiscal 2020. The discussion today and the responses to your questions will contain forward-looking statements regarding our projected financial results, financial prospects, market growth, and demand for our solutions, among other things. These statements are subject to risks, uncertainties, and assumptions. Should any of these risks or uncertainties materialize, or should our assumptions prove to be incorrect, our actual results could differ materially from these forward-looking statements. We're under no obligation to update these statements.

1:33 These risks, uncertainties, and assumptions, as well as other information on potential risk factors that could affect our financial results, are more fully described in the documents we file with the SEC, including annual report on Form 10-K, filed on March 29, 2019 for fiscal 2019 ending January 31, 2019 and the form 10Qs filed on June 7, 2019 and on September 6, 2019 for the fiscal year 2020 ending January 31, 2020. Access to our third quarter fiscal 2020 results press release, historical results, SEC filings and a replay of today's call can be found on the investment relations portion of our website. I'll now turn the call over to Dr.

2:24 Fermi Wang. Thank you, Louis, and good afternoon, everyone. Before I discuss our results, I will provide an update on geopolitical factors that may continue to impact our business. During the quarter, we provided an update on the impact to our business from the entity list published on October 9th. While this brought clarity to some trade issues, we continue to see a wide variety of geopolitical risk outstanding, including foreign policy, trade, and IP matters. Factors potentially disruptive to our business include changes to tariffs and all the entity lists, market share shifts between our customers, supply chain issues, potential export regulations on advanced technologies, and the potential for customers in China to take actions to reduce their dependency on U.S.

3:18 components. On the other hand, our largest competitor in the security camera SOC market, HiSilicon, a unit of Huawei, is facing challenges that are helping us gain shares outside of China. As you can see, multiple factors, both positive and negative, are contributing to a wide range of potential outcomes for us. We continue to demonstrate strong progress toward our strategy to transform from a pure video processing company to an AI and a computer vision company. During Q2, all of our CV family contributed to the early ramp in our CV revenue, with mass production shipments continuing in the automotive and security camera markets.

4:05 CV design activity remains strong. In Q3, we generated pre-production CV revenue, including engineering parts, Evaluation Kit, and our development boards for more than 50 customers across all applications and geographies. Our Q3 fiscal year 2020 revenue of $67.9 million was above the high end of our guidance range, and the revenue increased 20% from the $56.4 million in the prior quarter, with strength for our traditional video processor in all markets, led by our automotive business. Security camera revenue was driven by strong underlying consumption, as recently reported by several of our large customers, as well as inventory restocking at our customers in China and the share gains.

4:59 I will now talk about our progress in our target markets, starting with security. As China's public security export held in October, we demonstrated a number of advanced imaging and AI technologies and at enabling the next generation IP security and the robotics applications. This included using a single RGB IR sensor with a sensor fusion software to eliminate the mechanical IP filters and preserve color information under near IR illumination. We also demonstrated rapid person detection using AI algorithms running our CV25 SOCs to enable fast system boot and reduce power consumption in battery-powered applications. We also demonstrate our new robotics SDK running multiple neural networks and stereo processing concurrently on a single CB2 SoC to provide a full frame rate object detection, classification, and tracking with depth measurements and segmentation.

6:02 We believe the new SDK will enable our customers to develop solutions for a wide range of new machine learning applications spanning logistics, Industry 4.0, New Retail, and both Consumer and Industrial Robots. At the TSX 2019 Security Show held in September, Hanhua TechWin, a leading supplier of IP video security solution, announced its new P&O series of AI cameras based on Embraer's CB22 CUflow SoCs. The new cameras run neural network-based algorithms to recognize different types of vehicles, faces, license plates, and other objects. Offering greatly enhanced video analytics accuracy versus previous generations, the cameras are available in both 4K and 5 megapixel resolution models.

6:58 Also, as the GSX showed, Bosch introduced multiple new IP cameras based on Embraer SOC solutions. This included its intelligent i-Series cameras including new Flexi-Dome and the D-Niang camera models with building video analytics as standard. Enter the new Auto-Dome Starlight 7000i cameras that include intelligent video analytics, ability to track and zoom in on moving objects, 4K resolutions, and advanced H.265 video compression, making them ideal for applications such as city and highway surveillance. During our last earning call, we discussed Motorola Avizion's introduction of the H5A AI camera bit line based on our C4 SOCs.

7:48 During the current quarter, Avizion further extended its portfolio with the introduction of its new H5 SL camera line based on Umbrella's H5L SOCs. Focusing on simplicity, flexibility, and cost effectiveness, the new cameras come in multiple resolutions and incorporate Avigilon's unusual motion detection and advanced AI technology that can notify operators of unusual events that might otherwise have been missed. In November, security startup Fukada announces a new dome series comprising eight new cameras, including both indoor and outdoor models with a range of resolutions up to 4K.

8:34 The umbrella-based dome series is eight times more powerful than the previous generation, enabling industry-leading age-based analytics, including advanced vehicle and the person detection. In the home monitoring segment, Market Leader Ring introduces Indoor Camera, a compact plug-in design that lets you see, hear, and speak to people and the pads from your phone, tablet, or Echo device. Based on Embraer's H2LM SoC, and the price at under $60, the cameras provide notifications whenever motion is detected based on customized motion zones. Multiple indoor cameras can be connected via a ring of app to provide complete home coverage.

9:21 And in China, Hikvision's consumer division, EasyViz, introduced its LookOut EP1 HD video smart home door viewers based on Umbrella's A3LM SoC. Replacing the P-hole in the door, the battery-powered camera allowed the homeowner to view visitors remotely on a touchscreen display and communicate with them using two-way audio. And in police camera category, Motorola Solutions announced its new WatchGuard V300 body-worn camera, the first in the law enforcement industry to remain operational beyond a 12-hour shift. featuring Embraer's low-power H5LM SOC. The camera includes 5K sensor and a full HD recording, and it can also be integrated with WatchGuard's in-car video systems.

10:16 Now I will update you on our progress in automotive markets. Embraer is working with Mercedes-Benz Vans to develop its H platform for their cargo recognition and organization system called Coros. The newly developed Corvus system actively supports parcel delivery drivers with camera-based object tracking and a machine learning software. A camera system in a cargo space automatically recognizes and registers parcels using barcodes and the symbols on the outside of parcels. This is done in fractions of seconds, replacing manual time-consuming scanning and sorting of each shipment. Embraer's CV2 was chosen due to its excellent imaging, molecular, and the stereo vision processing options, and the powerful AI processing platforms.

11:10 We are seeing strong interest in Embraer's CD4 AI chip from companies that provide aftermarket fleet management solutions for commercial vehicles. Traditionally, video solutions from the commercial vehicle comprised of cameras with limited or no active driver assistance or monitoring features. With Embraer's portfolio of CVflow AI chips, fleet management solution providers can now deploy AI-based applications such as a front ADAS, active driver monitoring systems, and blind spot detection. The CVflow solutions have been chosen by multiple providers in Asia and the USA and are expected to go into production in 2020. During the AutoSense Brazil's 2019 automotive conference held in September, Umbrella partnered with OnSemi and AI software startup company Iris to demonstrate a fully integrated in-cabin monitoring system including both driver and occupancy monitoring functions. The multi-camera system utilized Umbrella's CV2AQ, CV4SoC to process real-time high-quality RGB IR video and OnSemi global shutter and RGB AI image sensors.

12:27 The IRIS AI software performed the complex body and the facial analytics, passenger activity monitoring and object detection, all running concurrently on the CV2AQ. The demonstration won awards for the best automotive safety system and most innovative in-cabin application. And during the Tokyo Motor Show held in September, Embraer partnered with a leading Japanese car manufacturer and a Sony sensor group to demonstrate an electric mirror system. Based on Embraer's CV22 CVflow SOC and Sony's IMX490 image sensor, the electronic mirror demonstrated outstanding image quality under a number of challenging low light and high contrast lighting conditions.

13:15 In automotive OEMs, Chinese automaker Chery Introduced is a TIGO 8 SUV featuring an integrated digital video recorder. Supplied by Chinese tier 1 supplier Skyworth, the recorder is based on Umbrella's A12A automotive SOC and support 4 HD video recording. In consumer market, we also enjoyed a couple of interesting product introductions during the quarter. In October, drone market leader DJI introduced its lightest and smallest model ever, the Mavic Mini. Weighing just 249 grams, the $399 drone does not require FAA registration and achieves over 30 minutes flying time. Its camera is based on Umbrella's H22 SoC, providing 2.7K video at 30 frames per second and 12 megapixel photos.

14:13 higher than the full HD video of the previous Magic Spark model. Also during the quarter, Insta360 introduced its Go camera, a tiny full-factor wearable model wearing only 20 grams and offering full HD video recording. Based on Umbrella's A12 SoC, the camera includes video stabilization to keep footage steady and use AI-powered flash cut to find your best shots and activate automatically. In summary, despite the geopolitical and economic headwinds, we remain highly confident while making the right decision with more than $350 million invested to date into video-based AI.

14:59 We remain fully committed to driving our CV solution into expanding case of endpoint devices. We are leveraging our video processing expertise as well as our established base of customers to serve not only the traditional human viewing market, but also the machine-based market, a large incremental opportunity. The multi-billion dollar expansion in our SEM originates not only from the new product cycles in our existing markets, like security camera, but also by the new machine vision markets including vehicle, smart cities, industry 4.0 logistics, robots, and more. As we approach the end of year, We are looking forward to the Consumer Electronics Show in January. During this event, we will be demonstrating our fully autonomous vehicle EVA, showed for embedded vehicle autonomy, driving in a variety of challenging conditions.

16:00 We will also be demonstrating our latest solution for ADAS, driver monitors, electronic mirrors, and in-cabin monitoring in collaboration with our software partners. and we will show new solutions for robotics, home monitoring, access control and logistics, all leveraging AI-based applications and the performance of our series of SOCs. And we hope to see many of you there. And at the end, I want to thank Embraer's 756 strong team for their focus and execution during this very exciting phase of development and thanks to all our other shareholders, including customers, vendors and shareholders for your continued support. Now I will turn the call over to Casey for the third quarter financial details and the guidance for our fourth quarter of fiscal 2020.

16:54 Thank you, Fermi. Good afternoon, everyone. Today I'll review the financial highlights for the third quarter of fiscal 20 and provide a financial outlook for the fourth quarter of fiscal 20. During the call, I'll discuss non-GAAP results and ask that you refer to today's press release for a detailed reconciliation of GAAP and non-GAAP results. For non-GAAP reporting, we have eliminated stock-based compensation expense adjusted for the impact of taxes. Our Q3 revenue of 67.9 million exceeded the high end of our guidance of 63 to 67 million. These results represent an increase of 20% from Q2 and an increase of 19% when compared to the same quarter of the prior year.

17:40 In Q3, all markets increased sequentially, led by strength in the automotive OEM and aftermarket. Non-GAAP gross margin for Q3 was 58.1%, similar to the preceding quarter. Gross margin was slightly above the high end of our guidance of 56 to 58%, due in part to a richer mix of automotive business in both OEM and aftermarket business. Non-GAAP operating expense for the third quarter was $29.3 million compared to $29.7 million in Q2 after backing out R&D grants related to prior periods. This was below our guidance range of $30 to $32 million as engineering hardware expenses were below budget.

18:30 Other income of $1.9 million primarily represented interest income on our cash and marketable securities. Non-GAAP net income for Q3 was 11.3 million or 32 cents per share compared to 7.3 million or 21 cents per share in the second quarter. The non-GAAP effective tax rate in Q3 was 6.6%, slightly better than our guidance of 10% due to a higher than expected benefit from employee stock option exercises. In the third quarter, the non-GAAP earnings per share were based on 34.8 million shares as compared to 33.9 million shares in the prior quarter.

19:15 Total headcount at the end of the third quarter was 756, with about 81% of the employees dedicated to engineering, most of whom are focused on software. Approximately 70% of our total headcount is located in Asia. In Q3, we generated positive cash operating cash flow of 21.9 million, Cash and Markable Securities were $400.8 million, up from $375.8 million at the end of the second quarter. We did not repurchase stock during the quarter under the $50 million repurchase program authorized through June 30, 2020. Total accounts receivable at the end of Q3 were $21.6 million, or 29 days sales outstanding. This compares to accounts receivable of 27.9 million or 46 days outstanding at the end of the prior quarter.

20:12 Net inventory at the end of the third quarter was 19.8 million compared to 17.4 million at the end of the previous quarter. Days of inventory decreased to 59 days in Q3 from 67 days in Q2. We had two 10% plus revenue customers in Q3. WT Microelectronics, a fulfillment partner in Taiwan who ships to multiple customers in Asia, came in at 63.2% of revenue, and Chikoni, a Taiwanese OEM who manufactures for multiple customers primarily based in the U.S., came in at 15.7%. I will now discuss the outlook for the fourth quarter of fiscal 20.

20:57 Our fourth quarter fiscal 20 guidance is consistent with the current street consensus estimate. We expect total revenue for the fourth quarter to be in the $55 to $59 million range. Q4 is typically a seasonally slow quarter and we anticipate automotive and security to be down sequentially with other revenue flat to slightly up sequentially. We continue to expect other revenue comprised primarily of consumer electronics products to remain volatile and decline as a percentage of revenue over the next two to three years. The geopolitical economic environment continues to generate a significant amount of uncertainty with our customers, outlooks, and supply chain. Needless to say, forecasting is difficult.

21:45 We estimate Dahua and Hikvision combined by the end of fiscal 20 will have pulled in approximately $10 million of revenue from fiscal 21. As a reminder, we typically experience a sequential decline in the first quarter ending in April and a rebound in our second fiscal quarter. We estimate Q4 non-GAAP gross margin to be between 56.5% and 58.5% compared to 58.1% in the third quarter. We expect non-GAAP OpEx in the fourth quarter to be between $29.5 and $31.5 million. The Q4 non-GAAP tax rate should be modeled at 10% versus 6.6 in Q3 and 9.1 in Q2.

22:35 The tax rate has normalized from Q1 levels as our increased level of profitability enables tax losses in certain jurisdictions to be utilized. We estimate our diluted share count in Q4 to be approximately 35.2 million shares. Amarillo will be participating in the 41st NASDAQ Investor Conference on December 3rd in London, the Deutsche Bank Autotech Conference on December 10th in San Francisco, the Numura 101 Conference at CES on January 6th, and the Needham Conference in New York on January 14th. Please contact Louis for more details on these events. Thank you for joining our call today, and with that, I'll turn the call over to the operator for questions.

23:22 As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. And our first question is from Matt Ramsey from Cowan. Your line is now open. Thank you very much, guys. Good afternoon, everyone. I wanted to ask a couple of longer-term questions for me. One of the and I know there'll be some focus on the pull-ins from the Chinese customers, but in your other markets, you talked a little bit more in the script today about robotics than I've heard you guys talk about in the past and we've known it's been a long-term opportunity for the company, but now that you're calling it out more on the earnings call here, I wondered maybe if you could talk a little bit about the types of engagements, the breadth, Thank you for pointing that out because you are right.

24:25 This is the first time we have highlighted our robotic application in our conference call. The reason for that is this is the first time we disclosed we have a robotic SDK available for our customers. As you know, in the past, we never claimed that we are a programming platform that a customer can buy our platform and program themselves. Our strategy is always to understand what customer needs and we provide the embedded video and the AI calls or the functions required to deliver for the function for the customer's application. and therefore what that means is we really need to provide a complete software SDK and today's call we highlighted that we have the first generation of SDK available in there. We not only provide multiple neural networks that are required for most majority of the robotic application but also we have a mono and the stereo processing.

25:29 We have low light integrated and all of that can run concurrently on a CV to SOC, which I think is a great technology achievement. So from a technology point of view, we are making clear that we are ready to support our customer, and also you can see that this SDK, it become matured after working with multiple robotic customers for different locations. Although, I think, you know, you can see that we target on the smart manufacturing, smart CD, and also logistic applications. You know, you can imagine that if you look at our details, our SDK, you can see that this kind of robotic can be applied to both commercial as well as consumer applications.

26:16 So I just, in terms of revenue, I think we are at the beginning of a DesignWin activity and we hope that we can close on DesignWin soon. So we are saying probably this is a 12 months away revenue opportunity for us. But nonetheless, it's very important for us to highlight that we have a robotic SDK target for the robotic applications. Most of our customer will find out that if they review our SDK, they will find out that our SDK has majority of the function features they require, they can quickly pull the application over and start testing the performance, power consumption, and other benefits we're offering. Got it. Thank you for that perspective. It's helpful.

27:02 As my follow-up, I wanted to ask a question on the automotive business. Often, I hear focus on what you guys are shipping today and towards the data recorders and then sort of the really long-term focus on ADAS and autonomous. And I wanted to ask about a deal that I think you announced just on this call with Mercedes-Benz for an in-cabin application. Maybe you could talk a little bit about what that engagement is and what that opportunity represents. Thank you. All right, so this is really more of a commercial vehicle, and the function is really that In a delivery van situation, you can imagine that when a parcel is being brought into the cabin, and today you use manual process to log the parcels and also managing the parcels.

27:57 But with our robotic SDK, you can imagine that the camera installed in the van can quickly scan those boxes, determine the size, as well as with barcode, we can understand the information of the receivers as well as the content of the box. and then you can quickly managing and putting the right place and when the driver need to pull out that box that can be quickly done by just looking at the scanner data. So I think that's just one way to show you that a lot of the manual process in the delivery industry in the past will be optimized by cameras, and it can be done purely by one chip of CV2 running multiple cameras inside there. So this is really a commercial-based in-cabin application, and we work with the OEMs directly to put a solution together. And in fact, what we did is, just like you said, we provide SDK, but they have to work with us closely to port their application onto CV2.

29:08 And the reason we want this is really that we solve the solution of low light in cabins, the lighting conditions is limited, and we have stereo, we have mono, we have video processing, and also we have CPU all integrated in one chip to provide all the function they need for that delivered truck. We are excited about this opportunity, and we believe that this is just one of the several of design we will talk about in the future. Thanks, Fermi. Just one little quick follow-up on that, and then I'll jump back in the queue. Sir, you're saying that this in-cabin application with Mercedes-Benz was you working directly with that OEM that has developed software on your CV flow architecture? Am I reading that right?

30:00 Thanks. That's correct. Thanks, guys. Thank you. Our next question is from Adam Gonzalez from Bank of America. Your line is now open. Hi, guys. Congrats on the strong quarter, and thanks for taking my question. I think I just wanted to clarify that you had called out a $10 million number for the pull-ins from 2021 in security. Just doing some quick math, it seems like that's pretty much a big chunk of the upside that you've seen the last couple of quarters in terms of your revenue performance relative to street expectations. Am I thinking about that right, or has the market share factor been more of a factor in fiscal 20 relative to the inventory pull-in? Thanks.

30:46 Yeah, what we've tried to do is characterize. Obviously, a lot of people have asked the question. We don't have perfect visibility into the characterized over the last few quarters. what we think that the potential amount that might have shifted by the end of this year from fiscal 20, excuse me, from fiscal 21 to fiscal 20. And so we actually had to make some assumptions and try to get an understanding from our customers What we're trying to say is that for the two years combined, if you had not had any of this situation, I think we've seen about $10 million pulled in from fiscal 2021 to fiscal 2020. Okay, got it. And is that still a risk moving forward or the update you provided on October 15th, do customers have some degree of comfort around You know, the need to build inventory in future periods, or is that, you know, is that just a thing of the past?

31:42 Thanks. Well, I think that in our price release in October 9th, we stated that we are comfortable there is no financial impact for Q3 and Q4, so we still think that's the case. The uncertainty is in the fiscal year 21, how does this bubble get consumed by the customer and when are they going to consume it and how are they going to impact our fiscal year 21, which is not clear to us. Okay, great. And if I can just slip in one more question, I'm just wondering if you had an update from any of your top security camera customers on what their AI-based camera target will be over the next couple of years? You're talking about professional security camera?

32:27 Yeah, professional security, yep. Yeah, in fact, you know, we pretty much think that the battle is kind of done. We won majority of the design we talked about in the last several calls, and we are on track to deliver the mass production with many of them this year, and the balance will follow next year. So from that point of view, we think that we just need to continue to help our customer to go into production. In fact, we mentioned several customers today. In the past, we talked about Avigilon, Hanhua Techwind, Vion, and today, Vokada, and in the future, we'll talk about the ones that get ready to move forward. But I assume, I believe that the majority of the current professional security camera customers will use our AI solution, and most of them will be in production by the end of next year.

33:24 Got it. I think I was just asking more on just the penetration of AI-based cameras overall when you look at the... Oh, I see. ...annual unit shipments, but yeah. That's a little difficult to say. You know, based on the current data we saw, it's really only the customer who already have the AI camera in production. But from that point of view, I think this is... I think they are doing better than their forecast, so I think I think definitely the AI has momentum, but I think we're on the very early stage of AI camera for professional security, particularly outside China. So I would like to see a couple more quarters of the round rate before we talk about penetration. But however, one thing I can say is all our customers are very eager to put the product out and introduce the AI-based cameras.

34:17 OK. Thanks, guys. I'll just get back in the queue. Thank you. Our next question is from Ross Seymour from Deutsche Bank. Your line is now open. Hi, guys. Thanks for letting me ask the question. Congrats on the results. That 10 million pull-in that you talked about, Casey, just not to get too granular on it, but any clue of when you expect that unwind to occur? Is it inclusive of your January quarter guidance, or do you think it's more of a fiscal 21 dynamic? Any sort of clues on that sort of linearity would be great. Yeah, no, I think it's a fiscal 21 type of a situation. I think that going into next year, it's impossible to tell if they're gonna hold it, if they're going to burn it off in a quarter or over the year.

35:07 But my assumption is that over the course of fiscal 21, they'll probably get back to more normalized inventory level. But again, that's not an exact science. But I just see it kind of getting burned off over fiscal 21. Got it. And then did you see any change in those customers' behavior when they got added to the entity list, specific to Ambarella, of course, and then once you guys put out the 8K that you could continue shipping? Was there volatility around that, or did it happen in such a short period of time that you really couldn't notice? Well, I think that, of course, they feel relieved when they realize that we can continue to ship. But I think that one thing also has become clear that Although we can continue to ship the product to them, they are definitely putting a plan together to focus on non-US-based component suppliers. So I think that's a trend that we need to continue to watch.

36:09 And then my final question on this topic, then I'll go away, is you guys also have been targeting customers outside of China for all the reasons we've already discussed. Any sort of metrics on the success in gaining design wins there, and have you seen those customers themselves start to gain market share? You know, based on our data, we believe that our non-Chinese customers definitely gain market share in the U.S., but it's not clear whether they gain market share outside U.S. So that's our current, the data we have that we can talk about. But I think that definitely reflects that in U.S., more people have concerns about the high-cyclic solution than other areas.

36:56 Yeah, just to add to that, a clear example is Hanwha Tecklin, which Fermi's talked about over the last couple quarters. That's a customer that in this whole as it all has played out has moved from HiSilicon to Ambarella and is also moving forward with our CV products and so there's a clear example where I think that we picked up some market share and I think that they're going to be a good customer and a good player in the market. Thanks for all those details. I'd like to sneak one housekeeping one in maybe for you Casey. In the past you talked about normal seasonality. I think on your last quarterly call for the January quarter. Is there such a thing as normal seasonal for your April quarter?

37:43 Yeah, I think that both the quarter that we're in and the April quarter are down roughly 12% to 15%. So we've guided to what we thought we were going to see in January. And then I think we'll probably see the normal 12% to 15% there as well. We then tend to have a stronger Q2 and Q3. Obviously, we're not guiding out that far today. But if you looked at historically, Those two quarters continue to rebound pretty substantially from the low in April, if you will. But that's what I'm talking about when I talk about that. Perfect. Thanks, guys. Thank you. Our next question is from Joe Moore from Morgan Stanley.

38:32 Your line is now open. Great. Thank you. In terms of the in-cabin monitoring, I guess it's probably similar to Mercedes. You know, you guys seem to be getting quite a lot of wins there, and I guess with some of the European NCAP standards, that stuff comes into production fairly quickly. Can you talk about, you know, when you might see actual revenue coming from those wins? And, you know, it seems to be predominantly CV2, so the more expensive products there that seems like a fairly sophisticated sale for you. So can you just talk a little bit more about that? Right, we haven't given a revenue guidance on the DMS or CMS yet. However, I want to highlight that for commercial vehicles, CV2 is more suitable because of the requirement for multiple cameras.

39:18 But I think that for consumer cars, I think CV22 might be a better fit because most of the consumer vehicle does not require stereo and the performance requirement on the camera side also is more limited. So I think that's just the difference between commercial and consumer vehicles. But like you said, we are trying very hard to get design wins on those areas. Great, thank you. And then on the consumer surveillance side, is it reasonable to think about CV sort of announcements over the course of 2020 and then revenue 2021? Is that kind of the right time frame or just maybe an update on what you're seeing on consumer surveillance? No, I think that's the right time frame. And also there are Thank you.

40:15 Our next question is from Quinn Bolton from Needham & Company. Your line is now open. Hey, guys. Thanks for taking my question. I just wanted to start first on the CV ramp, especially in the professional field. Security Camera. It sounds like it's still probably a fairly low percentage of your security camera revenue. You've talked now for a few quarters as to some of the design wins going to production now over the next 12 months. Can you give us any, you know, help us shape what you think CV might represent as a total of your professional security business, say, exiting 2019 and where it might go exiting 2020? Is that, you know, low single digits going to 25% of revenue, just any...

41:00 Help with what you think that ramp might look like as a percent of your sales would be great. Yeah, so obviously the ramp is just forming up in the last two and so it'll be single digits coming into next year but next year I think that we can see what we've talked about is material revenue from the CV and that certainly is more than 10% of revenue for next year and depending on how the consumer ramp comes in next year in the second half as we said that's going to start in the second half of next year that will kind of define the size of it but I think You'll probably see us sometime over the course of next year starting to talk a little bit more in specifics about CV as it becomes material.

41:45 Great. Then shifting to China, I think in your script you'd mentioned you're definitely seeing share gains outside of China among the customer base. Just wondering if you could come back and say within the China market how that competitive dynamic is shaping up for you and Any sense of your strength within the China customer base for domestic cameras versus export cameras? Right. So I think in the past, we didn't play much in their Chinese domestic market because that was basically high-tech market. And for the export business, I think that right now, the thing worries us the most is is about the U.S., most of our Chinese customers, especially Chinese system companies, sourcing from the non-U.S. components. And so our advantage has to be that we can provide differentiated technology that very few Chinese companies can compete.

42:50 So that's basically played to our strengths on CV and also video quality in the past. But definitely on the lower end side, we're going to see a lot more competitive because You know, not only Hi-Sec and there are many low-end component suppliers coming to the space, but however, I do believe in a middle and high-end specialty on the AI and also as well as the video processing technology that where we can differentiate it and we should continue to have a position for the export business. Great. And then just lastly, you guys mentioned the fleet management opportunity, the aftermarket fleet management, but potentially ramping. Thank you. Thank you. require auto qualification so that the fund design starts to the revenue usually is 12 to 18 months, which is longer than consumer but definitely shorter than most of the auto OEM business.

44:01 And we have been working with several both U.S. and Chinese companies working on the solution for fleet management. Basically, it's providing not only just recording but also AI for the driver monitoring, ADAS, blind spot detection, the combination of everything, especially for the multiple cameras around the truck. So I think that's definitely played to our strengths, but the system definitely is a lot more complicated than a consumer vehicle. So the tradeoff timelines, I would say, design timelines is roughly 12 to 18 months, and we think that we believe the first wave of revenue will come in the second half of next year. Great. Thank you, Fermi. Thank you. Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone.

44:51 Our next question is from Torres of Amber from Stiefel. Your line is now open. Yes, thank you, and congratulations on managing through this volatile environment. First of all, I guess for Casey, inventory day is 57. I know that's relatively normal for this particular quarter, but How are you thinking about managing your own inventories over the next few quarters, you know, given all the uncertainty that's out there? Yeah, I think we've been going down over the last four to six quarters quite a bit. I think we were in kind of low 30s and, you know, came down to around 17 last quarter. When we are looking at making sure that we can meet our customers' needs, and in particular when you look at Chinese leader being a lawyer this year and that, we've Pick the inventory up a little bit so that we'd be able to meet the needs for the quarter. But we're going to try to continue.

45:48 We've got good cash management. We had a great quarter this quarter, and we're over $400 million in cash. We're proud of that. But we also need to make sure that we're dealing with 14 to 16-week lead times, and we need to make sure that we're going to be able to react to our customers' needs. And so I think the inventory is generally at about the right spot, but we're going to have to look out into our forecast and understand how to balance that going forward. I would like to add, you know, since we started working with a sense of partners, they never told us that they have a tight wafer allocation. And this is the first time they told us that, and because I think my speculation is some of the Thank you very much. Thank you.

47:02 It sounds, based on your rhetoric, that you're going to see some material or relatively material consumer CV revenue second half of next year. Could you maybe single out a few of the applications that you think will be ramping at that time? I think just consumer IP and our current customer list, if you go through that, you can see we have a very strong customers in consumer IP security camera space, basically for home monitoring. and I believe that the trend will continue and the AI trend will continue there and most of them are having RFQs out there for the AI-based camera requirement for the second half of next year. Very good. Just one last question back to Casey. Casey, I know you didn't guide the April quarter per se, but based on your answer, should we then imply that some of this sort of 10 million pull-in already starts happening that quarter?

47:58 It's possible. As I said, the reason I stated that I think it'll probably be burned off during the full fiscal year is because it's really hard for me to judge the timing on that. And so it's difficult to peg that. I do think what I did guide to or talk about a little bit for that quarter is we will see the normal seasonal down 12 or so percent that we've seen over the last few years. I think that will definitely be there. What the impact for inventory will be in that one specific quarter is just really tough for me to say right now. Sounds good. Very helpful. Thank you, guys. Thank you. Our next question is from Charlie Anderson from Dougherty & Company. Your line is now open. Yeah, thanks for taking my questions, and congrats on a strong quartering guide.

48:45 I wanted to start with, in light of the $10 million comment, just maybe if you could touch on sort of the underlying growth rate within IP security, it sounds like. The number of end users is expanding. There's opportunity to pick up market share. You've got a product cycle that's ramping. So just real time, if we exclude out that 10 million, what do we think of the growth rate going forward to any degree? And I've got to follow up. Well, first of all, I think that from the market point of view, the professional security continued growth on a single-digit percentage. And the consumer is probably higher than that. And we probably follow the market. But at the same time, it's very hard to us to put a finger on this $10 million number. That's really our estimation based on the feedback from the customers. So there are a lot of guesswork in there.

49:34 We just want to give a clear guidance as much as we can to the customers about what we think and whether making sure that people understand the situation. Great. And then for my follow-up, on the R&D credit side, I wonder if maybe, Casey, you could just update us on sort of what we expect for the total for the year and then any view on that going forward in terms of impact. Thanks. Are you talking about the Italian credit that we've talked about? Correct. Yeah. So that's going to run about half a million a quarter. And so the last quarter had a catch-up in it, and that's what I pulled out in my discussion But what we said last quarter, and I think it still is going to be a pretty good estimate, is that it's probably about a half a million dollar benefit per quarter. And that's factored in our guidance.

50:24 Okay, perfect. Thanks so much, guys. You got it. Thank you. Our next question is from Torres Savanger from Stiefel. Your line is now open. Yeah, just a quick follow-up for Casey. Casey, as it comes to gross margin, We talked about, obviously, the mix eventually helping the gross margin through fiscal 21. Just wondering if you had any update on that. Well, I do think, yeah, as we get more and more CB revenue and more and more in the auto space, that will continue to help us stay in the guidance or get us back into the guidance of 59 to 62 that we have been in. Obviously, In the consumer, and in particular in China, the margin pressure there is probably most significant.

51:13 The customers there are the largest in the industry, and that's a fairly tough market to start with. And so depending on the mix from quarter to quarter, that's what you see. And, for example, we've talked about the last few quarters having a little higher mix there, and that's why the margins have been down a little bit. Sounds good. Thank you. Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Dr. Feng-Ming Wang for closing remarks. And everyone, I'd like to thank you for joining us today, and I'm looking forward to seeing you, talk to you next time. Thank you. Bye-bye. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.